In the Summer Budget the Government confirmed plans to include loans made through Peer-to-Peer (P2P) lending platforms which match people who want to borrow money with those happy to lend (cutting out the middlemen of banks and credit card companies) – as eligible for inclusion in ISAs. This is a move that will be welcomed by P2P lending enthusiasts given the benefits of holding income-generating loans in a tax-free wrapper. The Government have decided to do this through the introduction of a completely new, additional type of ISA in April 2016 – to be called the Innovative Finance ISA – rather than by including P2P loans within existing ISAs. At this stage there are no details on who might offer these or even how big the allowance will be.

Yet for those eager to participate in the P2P lending market tax efficiently, there are already opportunities to do so within existing ISAs, as it has also been confirmed that investment companies specialising in investing into P2P loans are eligible for inclusion into existing ISAs.

While the returns for P2P lenders are typically much higher than what they could achieve through a fixed term savings account, so too are the risks as individual loans are not covered by the Financial Services Compensation Scheme and, like bonds, they carry the risk of a default – where a lender fails to pay back the loan, or does not do on time.

P2P lending therefore carries risks. Unlike loans that trade on the markets such as corporate bonds, government bonds or high yield bonds, P2P loans are illiquid as there is no real secondary market, so as a direct lender on a P2P platform you should expect to hold them until maturity. However these loans do tend to be short term in nature, and can be just for a few months, whereas corporate bonds and government bonds may trade for many years before the capital is repaid.

P2P has also increasingly attracted the interest of institutional investors – notably in the form of investment companies. These investment companies allocate into a huge range of loans using the power of computerised algorithms to scoop up loans that appear on lending platforms that meet their investment criteria around the duration of the loan, the interest rates and the credit history of the borrower. Importantly the lending platforms will randomly allocate some loans for individual investors and others for institutional investors, so institutional investors are competing against each other to grab attractive deals and the direct investor is not consistently being squeezed out by the professional investor with expensive IT systems and massive processing speed.

The principle advantage of investing in P2P through an investment company is therefore incredible diversification, for which of course there are also management charges. Instead of picking a few loans, your risk is spread across many thousands. Additionally, listed investment companies investors can sell shares at any point when the markets are trading, whereas individual loans may need to be held to maturity. There are three investment companies in this space listed on the London Stock Exchange: P2P Global Investments, Ranger Direct Lending and VPC Specialty Lending Investments. In each case however, the existing shares trade at a premium to net asset value.

However, the largest P2P investment company, P2P Global Investments, which has been backed by some high profile fund managers, including the UK’s most well-known fund manager Neil Woodford, is currently seeking to raise an additional £400m through a Placing and Offer in the form of  C-shares. These are shares that will eventually merge into the existing company as the proceeds are invested.

P2P Global Investments is managed by Eaglewood Capital, a subsidiary of Marshall Wace, one of the UK’s largest managers of alternative investment strategies. It targets a yield of 6-8% on the issue price. Across the existing P2P Global Investments portfolio approximately 180,000 loans are held across fifteen P2P platforms globally, not just in the UK, providing significant diversification. It provides exposure geographically to borrowers in the US , Europe and Asia and a blend of loans to consumers but also small and medium sized enterprises. The number of loans should of course grow significantly as the fund raises more cash to invest.

Although this is firmly an income not a growth investment, there is also a potential kicker with this investment company, as it also owns equity stakes in P2P platforms, currently representing around 3% of the portfolio, so if the industry continues to grow rapidly, as it challenges the banks and credit card companies who charge vastly more interest to borrowers and provider lower interest to lenders, then investors in P2P Global Investments could benefit if the valuations of these businesses grow.

It is important to understand that this is still a very young industry, with the first P2P lending platform, Zopa, only launched in 2005 so has the potentially to grow much further but it’s youth also means it is difficult to see how the industry would cope in the event, say, of a global recession. This is clearly a specialist investment, in a nascent asset class but for those income seekers who are convinced that the P2P lending industry is set to continue its rapid growth as more people seek to cut out the banks, P2P Global Investments offers a very diversified route to participate.

Readers should note that the current P2P Global Investments C-share offer closes on 23 July.

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